Gold:
the ultimate store
of wealth that has been used since time immemorial. A hedge or in
troubled times, a 'safe haven' in the current crisis. If your wealth is
stored in gold, then who really cares if the financial system implodes?
Empires, currencies and rulers have come and gone... but gold has always
retained value and purchasing power. Of the various precious metals,
gold is probably the easiest, most liquid (easily traded) asset you can
invest in.
Gold is a traditional
hedge against inflation or deflation. Against currency devaluations.
Against avaricious or incompetent governments or Central Bankers. Or
shall I just say, in a less politically correct manner, that America is
bankrupt and Gold is the only real money? If you invest in Gold, you no
longer have to rely on the "full faith and credit" of the US government
- which is declining sharply.
If you're reading this article, you
probably don't need me to tell you why you should buy gold. It's
actually an obvious decision in the current economic climate. The
question is not so much should you buy gold, as can you afford to hang
on to assets denominated in a declining currency like the dollar or the
pound sterling or the euro...?
The US dollar typically rises or falls
inversely with the value of gold. Recently, although there's been a
slight increase recently, the trend of the US dollaris downwards. My
view is that the dollar will continue to decline until the US economic
fundamentals look better - till America comes out of bankruptcy, that is
- and that could take some years.
In terms of your savings or retirement
portfolio, this means that if you invest in things like bank deposits
(CDs) the net return is most likely negative. Since the beginning of
2003, US dollars held in 3-month US Treasury Bills have yielded less
than 3% per year (Source: Global Financial Data). Considering that the
inflation rate over this same period of time has averaged more than 3%
annually (Source: US CPI), the cash accumulated had less buying power in
October 2008 than it did half a decade before.
The carnage on Wall Street, and the
fallout around the world, looks far from over - despite what the Feds or
the mainstream media might have you believe. Every time there is a new
panic like another bank or insurer collapsing, a flurry of investors
with dollars, euro and pounds start a new mini gold rush.
At the same time, demand for the yellow
metal continues to significantly outweigh supply. The Chinese, for
example, love gold and have plenty of dollars. China is keen to
diversify its huge foreign currency reserves (by far the largest in the
world) away from the dollar. A small increase in China's percentage of
gold reserves would cause a huge increase in demand and consequently in
the gold price. Asia, particularly the Indian subcontinent, and the
Middle East (think Dubai) are also seeing large increases in domestic
gold demand as disposable income increases. When people think that paper
currencies will be worth less in the future, they have historically
looked to place their net worth into a more stable vehicle. And gold is
typically viewed as a safe form of currency, as its value isn't as
affected by inflation.
Why Buy Gold Offshore?
So far, so good. There's nothing
particularly new or controversial about the information above. But I
have always believed in a more offshore, skeptical, pragmatic approach.
Like it or not, we tell things as they are.
Can we trust government to manage our
finances? I think the overwhelming evidence suggests no. History shows
that gold is politically sensitive, and governments (read Central Banks,
particularly the Federal Reserve) don't like to see individuals buying
gold. Why? Because they can't control it. They can certainly try. For
example, in an earlier article you will find here, we asked seriously
Will the US Government Confiscate Gold?
Then suddenly, as of late September
2008, we saw the US Federal Government beginning to limit the access of
ordinary citizens to gold bullion - by withdrawing new bullion coins
from circulation. (Suddenly and unexpectedly in mid-crisis the IRS also
introduced a new form FBAR for reporting of foreign bank accounts)
What we can see from all this is that
the smartest strategy is to keep your gold holdings outside your
home jurisdiction -- where they will be well protected against all
sorts of threats from governments to predatory ex-spouses. So you need
to know:
How to Buy Gold Bullion
Offshore
Gold bullion is the most liquid form of
gold. If you want to buy gold with the idea that you'll ultimately sell
it, then you will want to buy gold bullion. Bullion means either bars or
coins. Fortunately, you can easily buy gold this way and just as easily
sell it again anywhere in the world. If you need to break it into
smaller denominations, you can for example exchange gold easily for
silver coins like Panama's old Silver Balboa or Mexico's silver coins.
You can buy gold bullion by looking for
offshore dealers. If you have a particular kind of coin in mind - like
the Canadian Maple Leaf or South African Krugerrand, to name a few of
the most popular gold coins - then do a search for that particular coin,
or find the official mint websites. For example, check out the South
African Mint or the Royal Canadian Mint. An interesting and more private
option for Americans is restricted circulation coins. When you want to
buy gold, these sites all contain helpful tools for finding local and
international dealers of gold coins.
Provided you don't 'look suspicious'
and you can prove the origin of your funds with some documents, it is
quite easy to buy gold bullion coins anonymously with cash. Some
countries, like France, charge sales tax on gold and so should be
avoided. Others place burdensome restrictions on export, like major gold
producers Brazil and South Africa. Others, like San Marino, are simply
too far from major gold markets for purchase there to be economical -
you would be saddled with high transport and insurance costs.
So where should or can you go to buy
gold offshore? The undisputed capital of the business is Zurich,
Switzerland. There you can buy and store your gold in the free trade
zone at the airport. Major Swiss banks like Credit Suisse will sell you
gold directly from their branches in Zurich Airport.
Most countries in mainland Europe are
good for buying gold. Luxembourg, for example, is a friendly little
place where privacy is still respected in precious metals transactions.
In the Americas, Mexico is another
country where you can simply walk in to a casa de cambio and
buy gold 'centenarios' over the counter for cash. Mexico has suffered
from so many devaluations and is also a major producer of gold and
silver, so investing in bullion coins has become popular there. There
has been a serious effort in Mexico to introduce silver coins as legal
tender. (For info on Mexican gold coins, known as Centenarios, visit
here...
Urgent Warning: Here's why you
should absolutely NOT Invest in Gold ETFs
In September 2008, shareholders in ETF
securities were left high and dry - unable to trade popular commodity
securities, due to concerns over the future of their backer, insurance
giant AIG. Overnight, banks and brokerages stopped making markets in the
Exchange Traded Commodities (ETCs) backed by the troubled insurer. The
price of the stoc
Gold ETFs are vastly different to
holding real gold. Turbulence, such as the above in the market, can
affect the value of those gold ETFs markedly. When you buy an ETF you
are buying electrons on a screen. It is not the same as buying real
solid gold. What if the bank or fund manager goes out of business? What
if trading in the shares is suspended, as for example short selling was
just suddenly banned? What if the whole exchange is suspended as has
happened in the past? Shares can be subject to massive manipulation and
liquidity problems. I believe we will see dual gold prices from now on -
one 'official' spot price, and another price dictated by pure supply and
demand which will dictate what you can actually buy and sell real gold
for in the real world.
If you own stock in an ETF, that means
you own a stock that depends on the price of gold, rather than gold
itself. No matter that corporations such as ETF Securities own gold. How
much gold they own is not clearly discernable by the average "Joe
Sixpack" who may own ETF stocks.
Even a downgrading by credit agencies
like S&P or Moodies can drastically affect the share price in ETF
Securities - as it has done! In September 2008 shares in ETF Securities
products, which were backed by AIG, were down as much as 50% in one
morning after the US insurer was downgraded by the rating agencies. The
cold hard reality is that if the issuer of an exchange traded note goes
bankrupt, investors holding exchange traded products backed by these
notes will join the ranks of other creditors hoping to get their money
back. With any gold ETF one does not own actual gold and cannot
automatically or instantly redeem gold from the fund.
Indeed, to buy gold ETFs is adventurous
and courageous - one might almost say dangerous - activity, in today's
economic climate, with so many Wall Street firms going under.
The same is true, in my personal
opinion, to the Perth Mint Certificate Program (PMCP). This program is
run by the government of Western Australia, and is offered by many gold
dealers and investment advisors around the world. The problem is, when
you do due diligence on the Perth Mint program, you will see that you
are not really buying physical gold. You are just buying papers or
'notes', and redeeming those notes later could involve substantial
bureaucratic hassle. You are also reliant on the Australian government.
If, for example, the US tried to confiscate all gold held by its
citizens, do you think the Australian government would co-operate? Most
likely yes!
Also be aware that if you hold shares
in an ETF they are reportable for tax purposes. Physical gold however is
not reportable. That's just another reason to consider real gold bullion
bought offshore, rather than exchange traded funds.
